Imposition of Civil Money Penalties By HUD

Many assume that the only way the federal government can impose a fine on individuals or companies is through a lawsuit in federal court. But individuals and companies who participate in HUD programs can be fined by the agency for violating program rules without any involvement by a court. Congress has authorized HUD to impose substantial civil money penalties on participants in a variety of programs. An Administrative Law Judge (ALJ) employed by the agency decides whether to impose the penalty—and the amount.

HUD’s broad authority

HUD can impose civil money penalties for a “knowing” and “material” violation of its requirements applicable to a particular program. In multifamily, HUD can impose civil money penalties against any mortgagor, general partner or officer/director of a mortgagor who knowingly and materially fails to provide “management for the project that is acceptable to the Secretary.” This covers fiscal management, maintenance of the project and handling of rents and vacancies.

A respondent’s ignorance of the applicable HUD rules or requirements may not be a defense to a civil money penalty action, however. Program participants are supposed to know those requirements and, if they don’t, they may be found to have acted with deliberate ignorance of, or reckless disregard for, the relevant prohibitions. As a practical matter, minor violations that don’t result in adverse consequences for HUD are unlikely to be penalized. But a violation that causes a loss to HUD, or results in adverse publicity for HUD, could trigger a penalty action. And, even if HUD does not suffer any loss as a result of a particular violation, it still can impose a penalty to send a message and deter other program participants from committing similar violations.

The amount of the penalty that may be imposed varies with the violation at issue. At the low end, the maximum penalty for each violation of the Interstate Land Sales Act is $1,100. For most other violations, the maximum penalty per violation is between $6,050 and $7,500, with a limit of $1,210,000 or $1,375,000 for all violations committed during any one-year period. A few violations carry a heavier maximum penalty: $11,000 for each violation of lead-based paint disclosure requirements, $16,000 for ethical violations by HUD employees and violations by applicants for assistance, $25,000 for violations by a Section 8 landlord, and $37,500 for certain violations by mortgagors of multifamily properties.

In determining the amount of the penalty to be sought in a particular case, the agency is required to consider the gravity of the offense, any history of prior offenses, the respondent’s ability to pay the penalty, the injury to the public, any benefits received by the respondent, the extent of potential benefits to other persons, deterrence of future violations and the degree of the respondent’s culpability. HUD need not consider a respondent’s ability to pay in determining the amount of a penalty unless the respondent specifically raises this issue. However, even if the respondent’s present assets are insufficient to pay the entire amount, HUD may consider the respondent’s prospective income over the coming years.

Strategy considerations

Congress has structured the civil money penalty laws in such a fashion that HUD’s decision normally will be the last word on the subject. While judicial review is available in theory, in practice it is difficult to persuade a court that the agency’s decision should be overturned because there was not “substantial evidence” that the respondent violated the HUD prohibition in issue or because the amount of the penalty imposed was unjustified.

The defenses that can be advanced by a respondent will vary. In some cases, there may be a factual dispute about whether the respondent engaged in the alleged misconduct or the extent of the respondent’s involvement. Or there may be a question about whether the respondent knew that the conduct in issue violated HUD requirements. In other cases, there may be a dispute about whether the respondent’s conduct violated the HUD requirements. Or the respondent may have a good faith defense based on reliance on the advice of counsel or reliance on advice obtained from HUD. In many cases, there will be no significant factual or legal disputes regarding the respondent’s liability. Rather, the respondent’s defense will be based on mitigation, extenuation, contrition and/or rehabilitation.

A common mitigation defense is that the respondent is unable to pay a substantial penalty. It may be difficult for HUD to ferret out all of the details or to counter a claim of inability to pay the penalty. The regulations contain a series of provisions designed to address this issue. First, a respondent’s ability to pay the penalty is presumed unless the respondent specifically raises inability to pay as an affirmative defense or mitigating factor. Second, if a respondent raises inability to pay as an issue in responding to a pre-penalty notice from HUD, the respondent must provide documentary evidence in support. Third, if the case proceeds to the complaint stage, the respondent’s answer must specifically assert inability to pay as a defense or mitigating factor. Finally, if the case proceeds to a hearing, the respondent bears the burden of proving inability to pay by a preponderance of the evidence.

Most civil money penalty cases are resolved through negotiated settlements. HUD has structured its regulations to promote early settlements. In 1996, HUD added the provisions for pre-penalty notices and responses. If a settlement cannot be reached, then the matter will be resolved by an ALJ who may take a more lenient view than the enforcement attorney who brought the case. If a hearing before the ALJ is desired, it must be requested within 15 days of receiving the complaint. The respondent’s written answer to the complaint must assert any defenses, mitigating factors or extenuating circumstances, and list any reasons why the proposed penalty should be less than the amount sought.

The initiation of civil money penalty proceedings by HUD must be recognized and treated by the respondent as a serious matter with short deadlines and significant consequences. To achieve the best resolution possible, it is vital to mount a prompt, vigorous, and knowledgeable defense.

Steven Gordon is a partner at Holland & Knight in Washington, D.C. He practices in the areas of white collar crime and civil litigation, including appeals.